Avoiding the 2020 AIA trap
At the end of 2020 the annual investment allowance (AIA) reverts to £200,000. If your financial year spans the change, transitional rules can unexpectedly restrict your entitlement further. Why, and what steps can you take to work around this?
The annual investment allowance (AIA) is a capital allowance (CA) which gives you a tax deduction for 100% of qualifying expenditure, e.g. purchase of equipment, incurred in the accounting period. With a few exceptions the AIA is allowed for the cost of all equipment which would qualify for CAs.
The maximum amount of expenditure which can qualify for the AIA is usually £200,000, but this was temporarily increased to £1 million from 1 January 2019 until 31 December 2020. There are transitional rules to work out the AIA for an accounting period which spans one of the change dates, i.e. 1 January 2019 or 31 December 2020.
The formula for working out the AIA for any accounting period which spans 31 December 2020 is (a/12 x £1,000,000) + (b/12 x £200,000), where “a” is the number of months in the accounting period falling on or before 31 December 2020, and b is the number of months after 31 December. The maximum amount of expenditure which can qualify for the AIA is capped to the proportion of the AIA limit applicable to each part of the accounting period.
Example. A Ltd’s next accounting year runs from 1 April 2020 to 31 March 2021. It has planned to renew some equipment over the twelve months. As it expects to spend around £180,000 the directors assume there will be no problem in claiming the AIA for all of it because it’s less than the temporary limit of £1 million and the normal limit of £200,000. But the transitional rules could prevent this.
The AIA for expenditure in the period 1 January to 31 March 2021 is capped proportionate to the normal amount, i.e. 3/12 x £200,000, which is £50,000.
If A Ltd were to incur all the £180,000 of expenditure on equipment in the period between January and 31 March 2021 it would only be entitled to the AIA on £50,000. The balance would qualify at the normal CAs rates of 6% or 18% per year on a reducing balance. This means it would take a minimum of twelve years to obtain even 90% of the tax relief it’s entitled to.
To avoid the trap and obtain the AIA for all its expenditure A Ltd should incur at least £130,000 (£180,000 - £50,000) of it on or before 31 December 2020.
The date on which capital expenditure is treated as incurred is the date that you commit to the purchase, i.e. usually the date you sign a purchase order or equivalent document.
After 1 January 2021 the maximum AIA is a fraction of the normal annual amount, e.g. if your financial year ends on 31 March 2021 it’s just £50,000 (£200,000 x 3/12). If you’re considering capital expenditure in excess of the restricted AIA, aim to spend on or before 31 December 2020 when the maximum AIA is much greater.
Reporting low emission vehicles – Changes from April 2020
From 6 April 2020, new appropriate percentage bands – and new lower charges for low emissions cars – will apply for company car tax purposes.
From the same date, the way in which carbon dioxide emissions are measured is also changing. This means that in order to find the correct appropriate percentage for working out the taxable benefit of a company car, you will need to know whether the car was registered on or after 6 April 2020 or before that date, as well as the level of the car’s CO2 emissions. As a transitional measure, with the exception of zero emission cars, the appropriate percentage for cars registered on or after 6 April 2020 is 2 percentage points lower than cars registered prior to that date for 2020/21 and one percentage point lower for 2021/22. The figures are aligned from 2022/23. For zero emission cars, the charge is 0% for 2020/21, 1% for 2021/22 and 2% from 2022/23, regardless of the date on which the car is registered. The maximum charge is capped at 37%. The diesel supplement applies as now.
More information will be needed to work out the appropriate percentage where the car’s CO2 emissions (however measured) fall in the 1—50g/km band. From 6 April 2020, this band is sub-divided into five further bands, each with their own appropriate percentage. The band into which the car falls depends on its electric range (also known as its zero emission mileage). This is the maximum distance that the car can be driven in electric mode without having to recharge the battery. The relevant bands are as follows:
• more than 150 miles
• 70 to 129 miles
• 40 to 69 miles
• 30 to 39 miles
• less than 30 miles
The greater the car’s zero emission mileage, the lower the appropriate percentage.
Splitting the 1—50g/km band introduces additional reporting requirements. The precise nature of those changes depends on whether car and fuel benefits are payrolled.
Where car and fuel benefits are payrolled, information on cars provided to employees is submitted to HMRC on the Full Payment Submission (FPS), rather than on form P46(Car). From 6 April 2020, where an employee has a car with carbon dioxide emissions that fall within the 1—50g/km band, the car’s zero emission mileage must be reported to HMRC in the new field that will be available from that date.
If car and fuel benefits are not payrolled, form P46(Car) provides the mechanism for letting HMRC know when an employee has been given a car for the first time or given an additional car. The form can be submitted in various ways – on paper, using the online service or PAYE online.
From 6 April 2020, the form will have an additional field for zero emission mileage which must be completed when providing an employee with a car with CO2 emissions in the 1—50g/km band. The deadlines for submitting the form are unchanged and are as shown in the table below.
Period in which change took place Deadline for reporting it to HMRC
6 January to 5 April 5 April (where electronic form used)
3 May (where printed form used)
6 April to 5 July 2 August
6 July to 5 October 2 November
6 October to 5 January 2 February
If you’re lucky enough to own shares which have increased in value you might be liable to capital gains tax (CGT) if you sell or transfer them. Working out the taxable gain isn’t always as easy as comparing how much the shares cost you with the amount you receive from selling them. When you buy or acquire shares of the same type in the same company at different times, their cost for CGT purposes is averaged. This is known as pooling.
Pooling can work for or against you. Shares on which you think you’ve made a loss or a small gain could show a large gain for tax purposes, or vice versa.
Example - part 1. In 2004 Ali bought 10,000 10p shares in Acom Plc for £12,000. He inherited a further 5,000 shares from his father in 2007 when they were worth £2.20 each and bought 1,500 more in 2018 for £6,500. In January 2020 Ali sold the 1,500 shares for £10,000. Ali assumes he’s made a capital gain of £3,500 (£10,000 less £6,500). But because all his shares in Acom are pooled and their costs averaged, the taxable gain is actually £7,818.
Using your annual exemption
If Ali made no other capital gains in 2019/20 he would not have to pay tax on his gain from selling his Acom shares because it would be less than the annual CGT exemption, which is £12,000 for the year. But if he had already made gains from selling other assets his miscalculation could result in an unexpected tax bill. Note. If Ali had made capital losses in 2019/20 these reduce the amount of taxable gains before applying the exemption.
Example - part 2. Prior to selling the Acom shares, Ali had made a capital gain of £8,000 from selling a property. He had assumed the gain on his Acom shares of £3,500 would push his total gains to £11,500, i.e. within the CGT exemption with a little to spare. But actually his taxable gains are £15,818 (£8,000 + £7,818) meaning that he’ll have to pay tax on £3,318 (£15,818 - £12,000 exemption).
Selling assets to utilise your annual CGT exemption is good tax planning. It prevents large gains building up in shares and so can significantly reduce tax in the long run.
If you’re married it’s relatively easy to double the annual CGT exemption by transferring assets to your spouse to sell. HMRC accepts this type of tax-saving arrangement.
Example. Instead of them selling all 1,500 Acom shares, Ali gave half to his wife to sell. The effect of the special rules which apply to transfers of assets from one spouse to the other means that when they sell they each make a gain of £3,909 (£7,818/2). Adding this gain to Ali’s others for 2019/20 means that his total gains are £11,909 - just within his annual CGT exemption of £12,000. Assuming his wife hasn’t made other gains exceeding £8,091 in 2019/20, those which she makes from selling the shares in Acom will be covered by her annual CGT exemption.
When you work out the capital gains or losses on shares remember that the cost of all shares you’ve bought at different times is averaged. Gains and losses you make in the same year are aggregated before applying the annual exemption. You can transfer shares to your spouse to make use of their annual exemption.
Changing accounting date
Making the most of pension tax allowances
Pension savings can be tax efficient as contributions to registered pension schemes, attracting tax relief up to certain limits.
Limit on tax relief
Tax relief is available on private pension contributions to the greater of 100% of earnings and £3,600. This is subject to the annual allowance cap.
Tax relief may be given automatically where your employer deducts the contributions from your gross pay (a ‘net pay scheme’). Alternatively, if you pay into a personal pension yourself or your employer pays contributions into the scheme after deducting tax, the pension scheme will claim basic rate relief (‘relief at source’). Thus if you pay £2,880 into a pension scheme, your scheme provider will claim basic rate relief of £720, meaning your gross contribution is £3,600. If you are a higher or additional rate taxpayer, the difference between the basic rate tax and your marginal rate can be reclaimed from HMRC via your self-assessment return.
The pension annual allowance caps tax-relieved pension savings – contributions can be made to a registered pension scheme in excess of the available annual allowance, but they will not attract tax relief. The annual allowance is set at £40,000 for 2019/20; although this may be reduced if you have high earnings. The annual allowance taper applies where both your threshold income is more than £110,000 (broadly income excluding pension contributions) and your adjusted net income (broadly income including pension contributions) is more than £150,000. Where the taper applies, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000 until the annual allowance reaches £10,000. This is the minimum amount of the annual allowance. Only the minimum allowance is available where adjusted net income is £210,000 or more and threshold income is more than £110,000.
The annual allowance can be carried forward for up to three tax years if it is not used, after which it is lost. The current year’s allowance must be used first, then brought forward allowances from an earlier year before a later year.
Harry has income of £100,000 in 2019/20. He has received an inheritance and wishes to make pension contributions of £60,000. In the previous three years he has used £10,000 of his annual allowance, leaving £30,000 to be carried forward for up to three years.
To make a contribution of £60,000 for 2019/20, Harry will use his annual allowance of £40,000 for 2019/20 and £20,000 of the £30,000 carried forward from 2016/17. The £10,000 remaining of the 2016/17 allowance will be lost as cannot be carried forward beyond 2019/20. The unused allowances of £30,000 for 2017/18 and 2018/19 can be carried forward to 2020/21.
Reduced money purchase annual allowance
A lower annual allowance of £4,000 (money purchase annual allowance (MPAA)) applies to those who have flexibly accessed pension contributions on reaching age 55. This is to prevent recycling of contributions to secure additional tax relief.
The lifetime allowance places a ceiling on your pension pot. For 2019/20 it is set at £1,055,000. A tax charge will apply if you exceed the lifetime allowance.
Steps to reduce CGT when selling your company
Since April 2016 the two main rates of capital gains tax (CGT) have been 10%, if your taxable income plus gains for the year fall within the basic rate band, and 20% if your income and gains are greater.
Where you sell your business, and meet the necessary conditions, a special 10% entrepreneurs’ relief (ER) rate applies regardless of how much your income and gains are. Before CGT starts to apply, every individual adult or child is entitled an exempt amount; for 2019/20 this is £12,000.
No gain, no loss
Special rules apply to transfers of assets between spouses. If one spouse gives assets to the other it’s treated as if they sold them to their spouse at the price equal to their cost, this is called a “no-gain, no-loss” transaction. If later the spouse who received the assets sells them for more than they cost the first spouse, they’ll make a capital gain, but they can use their annual exemption to lower or eliminate any CGT.
If you’re married or have a civil partner, you can use the no-gain, no-loss rule to save tax even where the rate of CGT you would pay is the lowest possible, i.e. where the ER rate applies.
Increasing the tax saving
The no-gain, no-loss rule doesn’t apply to gifts of assets to anyone other than your spouse or civil partner. Gifts of your company shares to children are treated as sales at their full value.
There is a legitimate way around this. You can claim CGT holdover relief. The effect of this is similar to giving shares to your wife. The gain is deferred (held over) until the children sell their shares. A holdover claim must be made jointly and usually anti-avoidance rules make it ineffective if the children are minors.
Before signing the sale contract, transfer shares to your spouse. This shifts part of the gain to them, against which they can use their annual exemption. You can achieve a similar result by transferring shares to family members, but this requires you to make a claim for “holdover relief”.
Benefits of putting a property into joint names prior to sale
Where a property qualifies in full for private residence relief, it is perhaps academic, from a tax perspective at least, whether a couple own it jointly or it is the one name only. In either case, the relief shelters any gain that arises and there is no tax to pay.
However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.
Take advantage of the no gain/no loss rules for spouses and civil partners
There are some breaks in the tax system for married couples and civil partners, and one of them is the ability to transfer assets between each other at a value that gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. This enables a couple to utilise available annual exempt amounts and lower tax bands.
Capital gains tax on residential property gains is charged at 18% where total income and gains do not exceed the basic rate limit (set at £37,500 for 2019/20) and 28% thereafter.
Ron and Rita have been married a number of years and in addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.
Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).
If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000 after deducting his annual exempt amount of £12,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of £24,640 (£88,000 @ 28%).
However, as Rita has her basic rate band and annual exempt amount available, making use of the no gain/no loss rule to put the property in joint names prior to sale can save the couple a lot of tax. Each will realise a gain of £50,000.
As far as Ron is concerned, £12,000 of his gain will be sheltered by his annual exempt amount, leaving a chargeable gain of £38,000 on which tax of £10,640 will be payable.
Rita will also have a gain of £50,000, of which the first £12,000 is covered by her annual exempt amount, leaving a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.
By taking advantage of the no gain/no loss rule to put the property into joint names prior to sale, the couple will be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110.
How to reduce the incidence of inheritance tax
Inheritance tax (IHT) is payable at 40% on the taxable value of an individual’s estate on death, after all deductions, exemptions, etc. are taken into account.
If chargeable lifetime gifts are made (usually gifts into a discretionary trust), any amount above the unused portion of the IHT ‘nil rate band’ (currently £325,000) is taxed at 20%. In this way, IHT can be payable upfront whilst still alive. The government currently raises £5.4 billion from IHT receipts (in 2020/21), expected to rise to £6.3 billion in 2023/24.
Strategies to reduce IHT - These measures can reduce an individual’s estate and save IHT; assets passing to a spouse or civil partner are generally exempt.
1. Making gifts to others - You can make a gift of any amount to anyone; so long as the donor survives for at least seven years, that gifted value is outside the donor’s estate. There is an annual gift exemption of £3,000 per annum; a small gift exemption of £250 to any person each year (irrespective of the number of people); and gifts in consideration of marriage (or civil partnership) of £5,000 per parent, £2,500 by a grandparent, and £1,000 by anyone else. Spouses and civil partners can generally make exempt gifts of any amount to each other (and the other spouse can then make onward gifts). Gifts for the maintenance of a spouse or child are not subject to IHT if certain conditions are satisfied. Payments representing normal expenditure out of income are exempt.
2. Making gifts to trusts - Gifts into trust up to £325,000 are free of IHT. Assets building value inside the trust will be exempt from IHT an individual’s estate unless the gift was a ‘gift with reservation of benefit’. Life assurance written in trust is generally exempt. Pension funds are also generally IHT exempt within certain limits.
3. Making gifts to charities - Assets left to charities are generally exempt for IHT purposes. A donor can also cut the IHT rate on the rest of their estate from 40% to 36% if at least 10% of the donor’s ‘net estate’ is left to a charity.
Use of nil rate bands - Each person has a ‘nil rate band’ (i.e. effectively IHT at a rate of 0%) (i.e. currently £325,000). In addition, if an individual’s present or former residence is left to a direct descendant in 2019/20, there is an additional ‘residence nil rate band’ of £150,000 (or £175,000 from 6 April 2020). Planning around the family home can save significant IHT. The ‘standard’ and residence nil rate bands can potentially be transferred to a spouse or civil partner if not used.
Investments that reduce IHT - Enterprise investment scheme and seed enterprise investment scheme investments held for at least two years are generally eligible for business property relief (BPR), including certain alternative investment market shares. Woodlands investments can attract BPR at 100%. Assets that have BPR and agricultural property relief attaching, such as farms, are relieved at up to 100%. A discounted portion of a ‘discounted gift trust’ investment can be immediately outside an individual’s estate.
Business strategies to reduce IHT
1. Director loan accounts (DLAS) are subject to IHT. This is money owed to the director by the company. It is important to keep a DLA low or to replace it with bank finance. Partnership capital accounts, on the other hand, are relieved by BPR and do not suffer IHT.
2. The value of private company shares is IHT taxable; however, BPR applies to shares in most trading companies at 100%.
3. Shares passing by way of a ‘double’ or ‘cross-option’ agreement are free of IHT where BPR is available, but shares passing via a ‘buy and sell’ agreement (i.e. a contract for pre-sale) is not. Check your agreements for IHT effectiveness.
4. It is more tax-efficient to pass shares by will or agreement than to sell them and be left with cash that is liable to IHT.
HMRC changes its time to pay arrangements
If you can’t meet your tax bills you can sometimes negotiate with HMRC for more time to pay.
You can get a time to pay (TTP) arrangement with HMRC for any tax. If you’re in business, you can apply not just for a self-assessment bill, but payroll taxes, VAT and corporation tax. However, unlike commercial creditors HMRC won’t ever reduce the amount of debt but it will tailor a TTP arrangement to your financial circumstances.
You may not get a TTP arrangement if HMRC doubts you’ll keep up with the payment schedule. HMRC will want from you about your finances.
Payment periods are as short as possible, usually twelve months or less. But for individuals there’s no longer a maximum. Contact HMRC as soon as you think you won’t be able to pay a tax bill. If it’s before the payment deadline, ring the Payment Support Service. If the payment date has passed, ring the self-assessment payment helpline if it’s a personal tax bill.
By agreeing a TTP arrangement before the tax bill is due you’ll avoid late payment penalties that HMRC would otherwise charge.
HMRC have a new system for applying online. The service can only be used for self-assessment tax bills, where you owe £10,000 or less, have no other tax debts and no other TTP arrangements.
HMRC puts non-payers into one of two categories - “can’t pay” or “won’t pay”. It will put you in the “won’t pay” category if it thinks you have the financial means to pay but are playing for time. If so, it won’t agree a TTP arrangement and will fast track enforcement proceedings.
HMRC expects you to explore other means of raising cash to pay your tax bill before agreeing to a TTP arrangement. This might mean selling investments or borrowing elsewhere.
If you’re in business, this can be a difficult equation. You might have funds on hand but need them to meet costs like wages in order to keep trading. HMRC should take this into account and classify you as “can’t pay”.
Remuneration strategy following policy announcements
The government announced in November 2019 that the scheduled reduction in corporation tax (CT) from 19% to just 17% from 2020/21 was not going to happen. It could have been worse for companies, given that many political parties wanted to reverse the recent trend of falling CT rates.
Many small companies are set up to cover single projects - typically in construction or IT - and the shareholder/directors may want to minimise their exposure to high marginal rates of income tax/ NICs on salaries and/or dividends. Such companies might then be wound up on the successful completion of the project and the shareholder/ directors might well then stand to benefit from ER on any accumulated profits that have not so far been paid out as salary or dividends. In the right circumstances, ER can offer significant savings, although there are numerous criteria and now special anti-avoidance rules, aimed at preventing ‘phoenixing’ companies and re- starting in the same sector. However, a genuine commercial basis for winding up the company should prevent the anti-avoidance legislation from being triggered.
1. There is little point in trying to defer corporate profits to later than 1 April 2020 to get them taxed at lower rates.
2. Shareholder/directors will probably want in coming tax years to increase their gross salaries to just below the rising threshold at which NICs become payable, to optimise their overall efficiencies.
3. The increase in employers allowance will make taking on a spouse, civil partner or close family member for a higher salary more efficient, where they might otherwise waste tax-free personal allowance and lower tax bands.
4. Where profits have accumulated in the business and the directors/shareholders hope to benefit from ER, there may well be some cases where triggering a disposal in the current 2019/20 tax year could usefully 'bank' ER before it is potentially restricted or even abolished.
Proper tax advice and planning is essential.
Missed the tax return filing deadline?
If you missed the 31 January deadline for self-assessment HMRC will fine you £100 and more if you continue to delay. It will cancel the penalty if you have a reasonable excuse.
Must you file a tax return?
It’s a common misunderstanding that if you owe tax you’re required to submit a tax return. The correct position is that you only need to file a self-assessment return if you’re asked to do so by HMRC. It does this by issuing a “notice to file”. However, to prevent you and any individual from dodging tax simply by not declaring income, you’re required to notify HMRC within a time limit if you believe you owe tax but haven’t received a notice to file - it’s then up to HMRC to issue one. If it doesn’t do so you won’t be penalised for not submitting a tax return by the normal deadline.
Notice to file received
Once issued, there is no appeal procedure against a notice to file even if you have no income, gains or other tax liability to declare.
If you receive a notice to file but don’t submit a return within the time limit the initial penalty is £100. However, even if you don’t owe any tax this can rise to £1,600.
Appealing a penalty
You can appeal against a penalty but HMRC will only cancel it if you have a reasonable excuse such as you or a close member of your family being seriously ill and this was a significant factor in you missing the deadline.
HMRC has the power to withdraw a notice to file. If it does so any penalties for late filing will be withdrawn. This option is only open to HMRC if you haven’t yet submitted the tax return in question and is entirely at HMRC’s discretion.
HMRC will usually agree to withdraw a notice to file a tax return if for a year you don’t meet its criteria for being within self-assessment. There are circumstances in which HMRC insists on self-assessment. For example, if you have income from self-employment or you or your partner receive child benefit and one of you has annual income exceeding £50,000.
If you don’t meet criteria for self-assessment for a year and haven’t yet submitted the corresponding tax return you can ask HMRC to withdraw the requirement to submit one. It has the discretion to refuse your request but if it agrees it will also cancel the late filing penalties. Use HMRC’s online tool to check if self-assessment applies.
SDLT and first-time buyers
Stamp duty land tax (SDLT) is payable on the purchase of land or property in England or Northern Ireland where the consideration is more than the relevant threshold. SDLT is a devolved tax and does not apply to property transactions in Scotland and Wales to which land and buildings transaction tax (LBTT) and land transaction tax (LTT) apply respectively. While these are similar to SDLT, the rules are not identical. This article focusses on SDLT as it applies to land and property transactions in England and Northern Ireland.
Nature of SDLT - SDLT is payable on residential and non-residential land and property, with different rates applying to residential and non-residential transactions. SDLT is payable when a person:
buys a freehold property;
buys a new or existing leasehold;
buys a property through a shared ownership scheme; or
is transferred land and property in exchange for a payment (such as taking on a mortgage).
Residential Property - SDLT is payable on purchases of land and property in excess of the residential SDLT threshold. This is set at £125,000. Different rates apply to different ‘slices’ of the consideration above the SDLT threshold. The residential rates at the time of writing are as follows:
Up to £125,000 0%
Next £125,000 (slice from £125,000 to £250,000) 2%
Next £675,000 (slice from £250,001 to £925,000) 5%
Next £575,000 (slice from £925,000 to £1.5 million) 10%
Remainder (slice above £1.5 million) 12%
HMRC have produced a calculator that can be used to work out the SDLT payable on the purchase of residential property. The rules and rates are different for first-time buyers and on second and subsequent properties.
Leasehold property - The residential rates above apply to the purchase price of the lease (the lease premium) on the purchase of new residential leasehold property. Further, if the net present value of the rent is more than £125,000, SDLT is payable on the portion over £125,000 at a rate of 1% unless the purchase is of an existing (assigned) lease.
Second and subsequent properties - Higher SDLT rates apply to the purchase of second and subsequent residential properties. Such properties attract a supplement of 3% on top of the purchase price where the price of the second property is more than £40,000. The rates on second homes costing more than £40,000 are as follows:
Up to £125,000 3%
Next £125,000 (slice from £125,000 to £250,000) 5%
Next £675,000 (slice from £250,001 to £925,000) 8%
Next £575,000 (slice from £925,000 to £1.5 million) 13%
Remainder (slice above £1.5 million) 13%
First-time buyers - To help first-time buyers buy their first home, SDLT reliefs are available for first-time buyers. First-time buyers do not pay any SDLT if they buy a property that cost no more than £300,000; where the purchase price is between £300,000 and £500,000, first-time buyer relief reduces the amount of SDLT payable - no SDLT is payable on the first £300,000 and SDLT on the portion between £300,000 and £500,000 is payable at a rate of 5%. First-time buyers who buy a property costing more than £500,000 pay the normal residential SDLT rates - there is no first-time buyer relief if consideration exceeds £500,000. A first-time buyer is an individual or individuals who have never owned an interest in a residential property in the UK or elsewhere in the world and who intend to occupy the property as their main home. It is not available to someone buying a property to let out. First-time buyer relief must be claimed in the SDLT return. The relief is worth up to £5,000.
Claiming property expenses 1
When the UK introduced self-assessment for tax purposes in 1996, the Inland Revenue made an effort to simplify our tax system, and one of the beneficiaries of this was the property owner who lets out a rental property as an investment. However, there are still many common misunderstandings of what the tax rules are, and sometimes landlords aren’t claiming everything that they are due.
Repairs or capital?
The rule is that repair expenditure is validly claimable against your rents, but capital expenditure, which improves the property, isn’t allowable. Apart from rare and specific exceptions like replacement double glazed windows as opposed to the old single glazed ones, if the effect of the work you do on the property is to improve it, this becomes a capital expense, relievable ultimately against your capital gains tax when you sell the property, but is not available to offset against the rents now.
Other capital expenditure
Property improvement isn’t the only type of expenditure that’s disallowable as ‘capital’. For example, legal costs of buying and selling properties are often wrongly claimed against the rents; but these are actually related to the purchase and sale transactions and should, therefore, be claimed for capital gains tax purposes rather than against income tax. The same applies to costs such as stamp duty land tax and land registry fees.
Expenditure covered by deposit
Although the use that landlords can make of tenants’ deposits has been very much restricted by recently legal changes, a departing tenant who has damaged the place can expect to have sums deducted from the initial deposit he had to lodge with the letting agent before he first moved in.
Club membership - is it tax deductible?
Imagine your company is in the north of England and you frequently visit London for business meetings. You join a London club as it offers convenient meeting rooms and a place to stay. Is the club membership tax allowable?
The tax rules for business travel costs can be unclear. The legislation isn’t precise, HMRC’s interpretation is occasionally unreasonable or out of date and most of the leading legal precedents date back to before the rules were modified in 1998. In a plain situation of say an employee travelling to see one of their employer’s customers, there’s rarely an argument - the costs qualify for tax relief. But the tax position becomes blurred when an expense is one which traditionally HMRC has refused relief for, such as membership fees for a private club.
What counts as travel expenses?
The expense might not appear to be for “business travel”; however for tax purposes it is. While the legislation doesn’t mention accommodation costs, it’s universally accepted that it applies to any expense directly linked to a business journey. The travel expenses rules are less restrictive than the general rules for business expenses.
The condition that job expenses must be “wholly and exclusively” for a business purpose to qualify for tax relief doesn’t apply to travel expenses. HMRC’s internal instructions make this clear.
HMRC internal manual Employment Income - Travel expenses: general: introduction: expenses do not have to be wholly and exclusively incurred: example
An employee has to travel to New York on business for two weeks. While she is there she has a free weekend and spends it taking a break in Boston. The cost of her flight to New York and any other necessary travelling expenses are deductible. They have been necessarily incurred in travelling to a temporary workplace. The fact that the break in Boston means that the travelling expenses have not been incurred wholly and exclusively for business does not matter.
The costs of the break in Boston, such as travelling to Boston from New York and the cost of staying in Boston, are not deductible. These expenses are not attributable to attendance at the temporary workplace.
Travel expenses incurred by a director or employee qualify for tax relief if either:
the director or employee’s job involves travelling, e.g. as a company rep, and it’s necessary to incur the expense in the course of doing that job; or
it’s necessary for them to travel to a place to carry out their job there, and they are obliged to incur and pay for the cost of the travel. For example, a decorator who is sent by their firm to paint a customer’s premises.
To determine if the club membership fees paid qualify for tax relief you need to consider the purpose of the membership. As long as it fits one of the circumstances described above you are entitled to tax relief even if you obtain some personal benefit from the membership (the wholly and exclusively rule doesn’t apply).
If HMRC disputes a claim there are two legal precedents to refer to regarding the tax treatment of private club membership fees claimed as an expense of employment. The first case (Elwood v Utitz (1965)) involves a director living away from London (Northern Ireland) but often visiting for business. The court ruled tax relief was due. The second case (Brown v Bullock (1961)), where tax relief was denied (he worked in London and could have chosen to have the meetings at a venue where no cost was involved)(HMRC usually quotes this decision when disputing tax relief for business travel costs which have a personal aspect), is helpful because it highlights the difference between an expense for personal reasons that also benefits the business and an expense incurred for business which also has personal benefits. In both cases the issue of whether the expense was “wholly and exclusively” was considered. However, this condition is no longer relevant to travel expenses (including accommodation) as in 1998 new legislation which largely reflected HMRC practice at the time, left out the wholly and exclusively test.
Entitlement to tax relief is available where the purpose for joining a club is to facilitate business meetings in London and any personal benefit is incidental.
In summary - the tax rules for travel expenses, including those for related accommodation don’t require that an expense is wholly and exclusively for business purposes, only that the purpose for incurring the expense was business. Any incidental personal benefit is irrelevant. Tax relief is therefore allowable.
Is advice about personal tax a business expense?
The First-tier Tribunal recently ruled on whether a company was entitled to reclaim VAT on fees it paid for advice about a scheme to reduce income tax bills for its directors.
Taylor Pearson (Construction) Ltd (TPC) reclaimed VAT of just under £10,000 that it had paid for advice involving complex scheme to remunerate its directors tax efficiently. HMRC argued that the scheme benefited the directors by saving them income tax and as this was a personal and not a business objective the company wasn’t entitled to reclaim the VAT on the fees. TPC’s counter argument was that the scheme had tax and NI advantages for it as well, and therefore it had a business purpose.
In case its main argument failed HMRC had a back up which was that there was no “direct and immediate link” between the VAT reclaimed with taxable supplies, i.e. supplies on which TPC would charge VAT. HMRC uses this argument if it objects to VAT being reclaimed but has no other solid legal grounds to refuse it. The “direct and immediate” argument derives from a Supreme Court judgment and so carries significant weight.
The judgment also states that VAT on purchases can be reclaimed if there is “...a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” . In other words, VAT paid on a genuine overhead of a business is deductible (unless specifically prohibited as is the case for business entertainment).
The First-tier Tribunal’s decision therefore turned on whether the cost of the advice it received was an overhead of TPC’s business or for the personal benefit of the directors. While there was no doubt that the latter was significant, the judge noted that the advice only related to tax and NI matters linked to remuneration from the company and not to the directors’ other income. It was therefore an overhead of the business and TPC was entitled to reclaim the VAT it had paid.
A company isn’t entitled to reclaim VAT paid on fees for advice given in respect of a director’s personal tax or other financial affairs.
The judge showed his displeasure with HMRC’s suggestion that incentivising employees by reducing their tax and NI bills on company income had no direct and immediate link with the purposes of its business. He said, “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward” . Especially as it had relatively recently lost a very similar case which it didn’t appeal against.
VAT paid on fees incurred by a company to minimise tax and NI liabilities on remunerating its directors or employees is a legitimate overhead of the business and can therefore be reclaimed.
Is a working holiday tax deductible?
Business, private and mixed expenses
The general rule for expenses; to be tax deductible they must be incurred “wholly and exclusively” for the business. This condition is modified for directors and employees who incur travel expenses; to be tax deductible they must be incurred in the performance of their job. However, this rule is not as straightforward as it might seem.
Example. A director often travels from home to visit a customer on the way to the firm’s offices. One interpretation of the rules suggests that none of the cost of the journey to the office from home is tax deductible because travel between your home and your normal place of work (a commute) counts as a private journey. Alternatively, the travel is two journeys, one from home to the customer and one from the customer to work. The second part meets the condition while the first doesn’t because any journey beginning or ending at home is commuting.
Because both interpretations have flaws HMRC usually accepts that a journey incorporating a business element which starts from or ends at your home meets the condition for a tax deduction.
Example. You travel 200 miles to visit several customers. You stay overnight in a hotel. In the evening you go to the cinema. While the cost of travel from your hotel to the cinema is clearly private, HMRC says this won’t jeopardise the tax deductibility of the main journey from your home or office to visit customers. HMRC’s guidance confirms this.
A business trip with pleasure
In the example above the purpose of the journey is clearly business which happens to offer an opportunity to undertake private activities. What’s more, it’s easy to identify and separate the business from the private element of the trip. This means the cost of travel from home or work to the hotel and the customer is tax deducible, while the cost of travelling to and from the cinema is not. A similar approach can be used to differentiate between deductible and non-deductible expenses if the main purpose of your journey is private but you undertake some business while away.
Example. You’ve booked your family’s summer holiday in southern Spain. You intended to leave them to their own devices for a couple of days while you fly to Barcelona to visit some work colleagues to discuss business. The cost of your and your family’s travel and accommodation in southern Spain is obviously not related to travelling in the performance of your job even though it is one leg of your trip to visit work colleagues. None of it is tax deductible. Conversely, the cost of your flight to and accommodation in Barcelona is business, and therefore tax deductible, even if you visit a bar or two in the evening with your colleagues.
If you’re combining business with pleasure keep detailed records that identify the tax deductible and non-deductible cost elements.
The main purpose of a trip determines if tax relief is allowed. If it’s private, no relief is allowed even if there’s a business element. However, separate costs you incur wholly for business while on holiday, say paying for travel to visit a customer, qualify for relief.
Reporting a pension annual allowance charge
If your pension savings for a year exceed your annual allowance (AA), either you or your pension provider must pay the tax. The first step is filling in the “Pension savings tax charge”’ part on your tax return. For help, look at form SA101 and use HMRC’s HS345 pension savings help sheet (see the links below).
Use Box 10 on the Pensions Savings Charges page if you have a charge, even if the scheme pays some or all of it. If they contribute, put the amount they pay in Box 11. You will need your scheme’s Pension Scheme Tax Reference to fill in Box 12.
If you forget to report the AA charge on your tax return you have twelve months from the filing deadline to amend it. For example, if you forget something off your 2018/19 return, which had to be filed by 31 January 2020, you have until 31 January 2021 to notify HMRC.
For the SA101
For the HS345
Changing accounting date
When you start a business, whether it’s via a company or sole trade, you can choose when your first financial (accounting) period will end. Tax and company law place limitations on companies but for unincorporated businesses the choice is more flexible. HMRC encourages unincorporated businesses to opt for an accounting period that coincides with the end of the tax year. This makes life simpler but is not necessarily tax efficient.
Over the life of a business you’ll be taxed on the profits your business makes. However, the year in which the profits are taxed can vary depending on your choice of accounting date. There’s no single right answer, as different accounting dates suit different situations.
Example. You started a business on 1 May 2017 and prepared your first accounts for up to 5 April 2018. These showed a loss of £6,000. In the next year, 2018/19, you made a profit of £5,200. You estimate your profits for 2019/20 will be £30,000. For tax purposes losses for which no special tax relief is claimed reduce future taxable profits. Therefore, £5,200 of the £6,000 loss is used to reduce the taxable profit to £0 for 2018/19. Because you had no other income in 2018/19 you would not have paid tax on the £5,200 profit even ignoring the losses as your tax-free personal allowance (£11,850) would have covered them. You’ve therefore wasted some of the losses on income that would have been tax free anyway.
Loss relief must be claimed within 20 months of the end of the tax year in which the losses occurred. As that was the tax year ended on 5 April 2018 you needed to have filed a claim with HMRC by 31 January 2020. Despite missing the time limit your can recover some of the wasted loss.
Retrospectively changing your accounting dates can alter which tax year profits are assessed. There are conditions and time limits but they allow for a great deal of flexibility in the first three years of a business.
You are entitled to amend your tax return for 2019/20 so that the accounting period for that year ends twelve months from the start of the business, i.e. 30 April 2018. Your accounts for the period 6 April 2018 to 30 April 2018 show a profit of just £120. So for the twelve months from the start of your business to 30 April 2018 your accounts show a loss of £5,880 (£120 profit plus the £6,000 loss from 1 May 2017 to 5 April 2018). Your taxable profit for 2018/19 is therefore £0 and you have only used £120 of your loss - the remaining £5,880 can be carried forward and used to reduce your taxable profits for 2019/20, which you know will be around £30,000.
Time limits apply but you can change your mind about the date on which your accounting period should end even after you’ve sent the figures to HMRC. This can change the amount of profit taxable for a year which means there’s some scope for retrospective tax planning.
Will HMRC write off your tax bill?
Tax bills not worth the effort
For many years HMRC adopted a policy of not assessing tax if the amount involved was small. 40 years ago the limit was £30 and eventually became £70. However, that was in the days when the Inland Revenue, as it was then, had to go through the rigmarole of manually writing or typing an assessment, posting it to the taxpayer and notifying the collector of taxes to issue demands. The so-called assessing tolerance disappeared with the introduction of self-assessment in 1996. However, HMRC has found it necessary to renew this old policy, but not in all situations.
If you submit self-assessment tax returns you’ll have to settle the tax bill that results, however small the amount. HMRC routinely make adjustments to eliminate very small debts, typically no more than £2. The legislation gives HMRC management powers to do this. It can, but very rarely does, use the same rules to write off larger sums, but it’s not open to negotiating a debt down.
HMRC will seemingly write off a debt if it loses track of someone who owes it money. This is usually no more than a temporary reduction. So if you change address when HMRC eventually tracks you down it will reinstate the tax charge and add interest to the bill.
Currently HMRC issues informal tax calculations known as P800s. The idea behind these is that rather than force individuals with simple tax affairs to complete self-assessment returns HMRC uses the information it has to decide if you you’ve over - or underpaid tax. It then asks you to pay or refunds you. The debt is not enforceable and so if you refuse to pay HMRC is likely to send you a self-assessment form to fill in or, if you have income that’s taxed through PAYE, adjust your tax code to increase the amount you pay on your salary etc.
P800s are often inaccurate and you should check them, especially if they include estimated figures (savings or investment income is usually estimated). HMRC must adjust the P800 if you provide it with the correct figures.
HMRC simple assessments
A few years ago legislation was introduced to allow HMRC to issue simple assessments in certain circumstances where a P800 is not suitable. Tax payable on a simple assessment is enforceable, but they too often include estimates and should be checked. Unlike P800s you must formally notify HMRC within 60 days if you disagree with the figures.
HMRC’s practice of not issuing assessments or P800s for small amounts is back. It should not assess you if you owe less than £50. If you receive such an assessment/ P800 call HMRC on the number shown on the document and ask for the debt to be cancelled. It will usually agree to this.
If you’ve completed a self-assessment return you must pay the demand, assuming the amount requested ties up with your calculations, no matter how small it is. However, if the demand is in respect of a Form P800 or simple assessment and is for less than £50, HMRC ought not to have sent it. It will usually cancel the charge if you ask.
When Goodwill helps
The valuation of assets can be important for tax purposes. For example, a valuation may determine the amount of inheritance tax (IHT) payable on a lifetime transfer (e.g. the transfer of an investment property to a discretionary trust) or on an individual’s death estate. In addition, an asset valuation may be needed to determine the capital gains tax (CGT) liability on certain disposals (e.g. a gift of investment company shares from parents to adult children). However, asset valuations can also be a crucial factor in determining the availability of tax relief in some cases. Two notable examples are highlighted below.
1. Entrepreneurs’ relief
The basic definition of ‘trading company’ for CGT entrepreneurs’ relief (ER) purposes is ‘a company carrying on trading activities whose activities do not include to a substantial extent activity other than trading activities’.
There is no statutory definition of ‘substantial’ for ER purposes, but it is generally accepted to mean ‘more than 20%’. There are several factors, some or all of which might be considered in determining whether non-trading activities are ‘substantial’ (i.e. income from non-trading activities, the company’s asset base, expenses incurred, time spent by officers and employees of the company in undertaking its activities, and the balance of indicators). On the ‘company’s asset base’ test, HMRC states: ‘If the value of a company’s non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company.’ However, HMRC acknowledges that it may be appropriate to take account of business goodwill not shown on the balance sheet.
2. Business property relief
A business owner may be eligible for IHT business property relief (BPR) if certain conditions are met. However, the relief does not apply (subject to limited exceptions) to a business (or an interest in it) or company shares and securities where the business carried on consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.
This ‘wholly or mainly’ test broadly means that if (say) a ‘hybrid’ company, i.e. comprising a trading business and an investment business (e.g. a company operating a manufacturing business and a residential lettings business) is 49% trading and 51% investment, an individual’s shares would not be eligible for any BPR at all, even in relation to the company’s trading activities. HMRC’s guidance on valuing a business for BPR purposes states that the company’s balance sheet will be the main source of information about the value of business assets (and liabilities) at the date of death/transfer. HMRC includes goodwill within the list of assets to be taken into account, even where no goodwill is shown on the balance sheet.
The valuation of goodwill is a specialist area. HMRC will normally refer the matter to its Shares and Assets Valuation division. Taxpayers and advisers are strongly advised to seek assistance from a valuation expert.
Benefits of putting a property into joint names prior to sale
Return of the two-tier NI threshold
The government has announced the rates and thresholds for NI contributions for 2020/21. There will be two NI earnings thresholds (ETs). While in 2017 the government committed to aligning the ETs for employers and employees to simplify employment taxes, from 6 April 2020 they will diverge again, this time by a significant amount. Employers will start to pay for NI on workers’ salaries which exceed the rate of £8,788 per year, while the workers won’t start to pay until their salaries exceed the rate of £9,500 per year. Be aware of the different ETs when working out the most tax-efficient salary to take from your business.
From 6 April 2020 employers will be liable to NI on salaries they pay if they exceed the rate of £8,788 per year while the trigger point for directors is £9,500. Make sure you take account of the different thresholds when working out the most tax/NI efficient salary to take.
HMRC’s VAT fixes
One of the last acts of the EU before Brexit was to make quick fixes to the VAT rules for intra-EU trade. These must be followed by UK businesses.
Simplification - The VAT quick fixes simplify the VAT rules for business-to-business transactions for EU cross-border supplies. For some years businesses importing or exporting between EU countries have sometimes been caught by conflicting VAT rules imposed by their respective tax authorities. The four quick fixes are to prevent such conflicts and became effective from January 2020.
Mandatory VAT number check for zero-rating - When you sell goods to a business in another EU country you must only apply zero-rate VAT if your customer provides you with their EU VAT number. While this has always been recommended practice, until the fix you were only required to have evidence that the customer was in business.
Proof of intra-EU supplies - When you make a supply to a business elsewhere in the EU you must now have at least two documents from sources independent from of customer which show that the goods you’ve sold have been delivered to a place within the EU.
Call off stock - Until now if your business transfers stock from the UK to a location in another EU country before supplying the goods to a customer there have been varying procedures in the different countries to ensure that VAT is accounted for correctly. The quick fix creates a uniform procedure.
Chain transactions - A new rule applies if goods pass through another business before they reach your customer in another EU country, e.g. a UK head office sells to one of its subsidiaries which in turn supplies the customer, but the goods are shipped directly to the customer. Previously there’s been doubt over which business, head office or the subsidiary, is making the supply. The fix requires that one business is identified as the supplier who is responsible for the VAT export procedures rather than them applying at each stage of the chain.
All EU countries must now follow uniform rules when exporting, including obtaining independent evidence that goods have been shipped and an obligation to check that your customer is EU VAT registered.
Businesses distracted by April 2020 IR35 changes
Changes to off-payroll working scheduled for April 2020 are causing businesses to overlook their normal obligations to check employment status.
Before IR35 existed HMRC frequently challenged the employment status of individuals who provided their services on a self-employed basis to businesses. Eventually, HMRC asked the government for a solution. IR35 gave it the power to extend its employment-status enquiries to individuals who worked for their customers indirectly, i.e. through an intermediary. The ongoing concerns regarding IR35, especially the April 2020 changes, is confusing businesses about their other employment status obligations.
New rules aren’t relevant
From 6 April 2020 businesses that aren’t small are responsible for checking the employment status of individuals who work for them through an intermediary. Until then it’s up to the worker to do it. All businesses, including those categorised as small, remain responsible for checking the employment status of individuals who work directly for them and are liable for any PAYE tax and NI lost if they get it wrong.
Which workers do you need to check?
You need to look at the overall picture of your firm’s relationship with the individual doing the work.
HMRC inspectors primarily look for whether you, the customer, control when and how the work is done and by whom.
It might be clear to you that a worker is freelance, but look at the position as an outsider might - is there the appearance of control over the work and the worker? If so, prove the self-employed status by entering all the facts into HMRC’s check employment status for tax (CEST) tool and keep a record of the result so you can deflect any HMRC enquiry before a tax inspector becomes entrenched in their view.
If you use the services of an individual working freelance, say a bookkeeper, you’re responsible for checking their employment status even if yours is a small business. Consider if someone outside your business could at first sight view the working arrangement as an employment. If so, use HMRC’s online status tool.
CGT gift relief
Gift relief (referred to as ‘holdover relief’) is available when a taxpayer has either gifted a business asset (or sells it ‘other than at arm’s length’), or disposes of an asset to a trust where the transfer is immediately chargeable to IHT. The relief does not exempt the gain completely; HMRC will still eventually receive the tax due on the gain on the disposal of the asset. It does, however, change who pays the capital gains tax (CGT) and the timing of the payment.
The identity of the ultimate payee changes from the donor of the asset to the donee. The timing changes from the date of the gift to the date the asset is subsequently disposed of by the donee.
Gift relief is extremely useful, as irrespective of whether the gift is made to a connected party or to a non-connected party in a ‘not at arm’s length’ transaction, the legislation dictates market value to be used (instead of the actual consideration (if any)) in the CGT computation. If this leads to a gain, the gain is taxable and any CGT will be due to be paid by 31 January in the year following the tax year of the disposal.
The issue is, in the case of a gift, no proceeds have been received, and in the case of a ‘not at arm’s length’ transaction, full market value has not been received; so there may be a cashflow issue associated with the payment of the tax.
Gift relief, in allowing the gain to be passed over to the recipient of the asset and not chargeable until they dispose of the asset, prevents this cashflow issue.
Two sections of the CGT legislation provide for gift relief. The first (TCGA 1992, s 165) allows gift relief for certain specific business assets. This is desirable for the economy as it is not in the government’s interest for CGT burdens to prevent the transfer of business assets, for instance, to the next generation. Gift relief must be claimed and the claim must be agreed and signed by both the donor and the donee.
The second form of gift relief is linked to inheritance tax (IHT) (TCGA 1992, s 260). This section allows gift relief for any asset, not just business assets. The conditions are that there must be both a charge to IHT and CGT on the gift/transfer. An example of this may be placing an asset into a discretionary trust. If the gift was made in the donor’s lifetime, this would normally be an immediately chargeable transfer for IHT purposes, and if a capital gain arises at the same time, the gain can be passed to the trustees and deferred for them to pay once they dispose of the asset in the future.
Gift relief under this section too must be claimed; but approval is required only from the settlor of the trust.
Gifting business assets is a crucial part of the succession of a family business. Gifting into a trust could incur IHT as well as CGT. Ensuring you are aware of the possibility to defer the gains in these situations may help enormously with the cashflow burden of a gain where no proceeds are received.
Interest & penalty charges for late filing & payment
HMRC operates a severe penalty regime to encourage compliance with self-assessment requirements. Failure to submit a return on time may attract a late filing penalty.
Late returns - The exact amount of any late filing penalty depends on how late the return is:
Length of delay Penalty
1 day late A £100 automatic fixed
penalty applies even if the
taxpayer has no tax to pay or
has paid the tax owed
3 months late £10 for each following day
up to a 90 day maximum of
£900 This is in addition to
the fixed penalty above
6 months late £300 or 5% of the tax due
whichever is the higher. This
is in addition to the penalties
12 months late £300 or 5% of the tax due
whichever is the higher This
is in addition to the penalties
In serious cases, HMRC may seek a penalty of up to 100% of the tax due instead. In some cases, the penalties can be even higher than this. These are in addition to the penalties above.
Late payments - The following penalties apply to late balancing payments of income tax and late payments of capital gains tax under self-assessment.
Length of delay Penalty
30 days 5% of the unpaid tax
6 months 5% of the unpaid tax
12 months 5% of the unpaid tax
Penalties are payable within 30 days from the day on which the penalty notice is issued There is a right of appeal against both the imposition of a penalty and the amount involved. HMRC may reduce a late payment penalty in special circumstances, which does not include an inability to pay. In addition, a defence of reasonable excuse may be available.
Interest on late payments - For income tax purposes, interest is normally charged on overdue tax from the due date of payment (31 January or 31 July) to the date the tax is actually paid. Interest charges also apply to late payment of penalties and in respect of tax return amendments and discovery assessments. The rate of interest charged on unpaid tax is currently 3.25% (from 21 August 2018). Interest is payable gross and is not deductible for tax purposes.
Claim R&D tax credits
The UK government offers tax relief on research and development (R&D) projects to reward innovation by UK businesses. While data shows an accelerating upward trend in the number of claims, many potentially eligible firms fail to claim the tax credits they are entitled to.
Despite the potentially transformative nature of the relief to small and medium-sized enterprises (SMEs), there is a widespread concern by business owners about the applicability of claiming R&D tax relief. The three main assumptions that stop companies from claiming R&D tax credits are outlined below:
1. R&D only applies to large companies: In fact, the R&D tax credit scheme for SMEs - defined as companies with fewer than 500 staff and either not more than €1O0 million turnover or €86 million gross assets - is considerably more generous than the research and development expenditure credit (RDEC) available to large businesses.
2. R&D applies only to science and technology: The R&D criteria have been kept wide on purpose so that companies taking a risk by trying to resolve scientific or technological uncertainties qualify for the tax credit claim.
3. R&D relief only applies to profitable (tax paying) companies: On the contrary, companies of all sizes can benefit from R&D relief as a cash credit where they are loss making. R&D tax credits can either help to reduce a limited company’s corporation tax bill or be claimed as a cash sum reimbursement from HMRC if the company is loss making.
There has, in fact, never been a better time to apply for R&D tax relief.
HMRC has cleared its recent backlog of R&D claims, reducing average processing time from an R&D claim being submitted to the tax credit from HMRC being received, from four to five months to four to five weeks. Any business needing a quick funding injection can now view an R&D tax relief claim as a potential cashflow boost.
At the time of writing, there is an impending Budget in February 2020, which may herald new changes to business tax. Whilst there is no way of knowing if the overall Budget outcome will make R&D tax credits more or less attractive, the new anti-abuse measures announced in last year’s Budget and consulted on in the spring will be revealed. These changes are set to reintroduce the PAYE cap on SME tax credits. The proposals would mean the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This will have a disproportionate effect on R&D claims from small and start-up companies with few employees.
Finally, Brexit is likely to have a significant impact on UK businesses. If forecasts are to be believed, foreign investment in the UK will fall. Uncertainty is likely to prevail for some time after an initial Brexit deal while the UK negotiates new relationships and trade deals with the rest of the world. Against a backdrop of a global economic slowdown, tax relief is more crucial than ever to boost profits, improve cashflow, and fuel further innovation and investment.
The above considerations should add an element of urgency for any company with a potential claim for R&D tax credits. The reality is that this relief is far more widely applicable than many believe, can be secured in a relatively timely manner, and continues to be hugely valuable to UK businesses who invest in innovation.
Claiming property expenses 2
The ‘Osborne tax’
Otherwise known as ‘Clause 24’, or ‘Section 24’ - this recent change in the tax rules comprises a disallowance of part of the interest paid on loans taken out in respect of buy-to-let properties.
For the 2018/19 year the rate of disallowance is 50%, but the way the mechanics of the Osborne tax work is to disallow the relevant proportion (i.e. 50% for 2018/19) in the first stage of the computation, and then bring back a 20% allowance lower down in the calculation.
Wear and tear allowance
The tax return doesn’t have a box for claimable wear and tear allowance any more, but this may not stop everyone from claiming it based on prior years. Wear and tear allowance was basically a rough and ready way of claiming for the cost of furnishing a residential property, and keeping that furnishing in good nick by replacing items when necessary. It was worked out as 10% of rents received, and this was allowed regardless of how much expenditure had actually been laid out on furniture.
This relief was abolished with effect from 6 April 2016, and now there is a relief called ‘replacement relief’ to do the same basic job.
Replacement relief applies to ‘domestic items’ such as furniture, appliances like fridges and freezers, and crockery - but does not apply to fixtures like boilers and central heating systems. The way the rules work is that you can claim the cost of replacing such items, but you can’t claim the initial cost of acquiring them in the first place.
Suggestions - The timing of refurbishment work on your property can make a difference as to whether it is claimable against tax. Gradual piecemeal work is more likely to be allowable than a radical gutting and replacement of interiors.
Don’t forget to retain a long-term record of expenditure that is capital and, therefore, disallowable against rents. This record will provide you with the numbers, and the evidence, for claiming a reduction in your capital gains tax when the property is ultimately sold.
Don’t forget that replacement relief is available for furniture, appliances, etc., and can make a big hole in your taxable rental profits in the year you incur the expenditure, even though the items concerned may be set to last for several years.
Paying dividends before the end of the tax year
Family companies should review profit extraction policy and consider whether they can and should pay further dividends before the end of the tax year. Dividends can only be paid out of retained profits and thus, unlike payments of bonuses or salary, the amount that can be extracted from the company as dividends is capped at the level of the company’s retained profits.
Retained profits are broadly profits on which corporation tax has been paid and thus they have already suffered tax in the hands of the company. For the 2019 financial year (i.e. running from 1 April 2019 to 31 March 2020), the corporation tax rate is 19%.
Once retained profits have been paid out as a dividend, they represent taxable income in the hands of the recipient. Consequently, the profits are taxed again. The combined effect of corporation tax already paid on the profits, plus the dividend tax on the dividend, may be less than the income tax and National Insurance contributions (NICs) that would be payable on profits paid out as salary, despite the fact that salary payments and employers’ NICs are deductible in computing the family company’s taxable profits. Unlike salary and bonus payments, there are no NICs to pay on dividends.
In the hands of the shareholder, dividends are treated as the top slice of income and taxed at the appropriate dividend rate of tax. The dividend tax rates are lower than the income tax rates, allowing for the fact that corporation tax has already been paid. Dividends are taxed at 7.5% to the extent that they fall within the basic rate band, at 32.5% to the extent that they fall within the higher rate band, and at 38.1% to the extent that they fall in the additional rate band.
All taxpayers, irrespective of the rate at which they pay tax are entitled to a dividend allowance (£2,000 for 2019/20). The allowance is really a nil rate band rather than a true allowance in that dividends which are covered by the allowance form part of band earnings. Dividends sheltered by the dividend allowance are taxed at a rate of 0% rather than at the relevant dividend rate. The dividend allowance is a useful tool.
Dividends come with company law rules, which must be adhered to. As well as restricting the amount of dividends that can be paid out to the level of the company’s retained profits, to comply with company law requirements dividends must be paid in proportion to shareholdings. Different dividends can be declared for different classes of share, providing the flexibility to tailor dividend payments to the circumstances of the recipient to ensure that dividends can be paid out in a tax-efficient manner.
Companies are advised to undertake a review so that they can decide whether it is desirable to extract profits from the company before the end of the tax year. If there are profits to be extracted, the company must decide how the profits should be extracted and who they should be paid to.
In order to answer these questions, it is not only necessary to establish what profits are likely to be available for extraction, but also what other income the family members have, whether their personal allowance and/or dividend allowance remains available and whether they have used up all of their basic or higher rate bands.
As a starting point, it is generally tax-efficient to pay a small salary and to extract further profits as dividends. Assuming the recipient’s personal allowance is available, the optimal salary is equal to the primary threshold for Class 1 NICs purposes (£8,632 for 2019/20) where the employment allowance is not available. If the employment allowance is available, the optimal salary is equal to the personal allowance (assuming that this is not used elsewhere), set at £12,500 for 2019/20. Above this level, it is generally more efficient to extract profits as dividends. Before paying out dividends, consider whether the optimal salary has been paid.
However, it should not be forgotten that there are other options for extracting profits, such as rent where the business is operated from a room in the family home, benefits-in-kind, pension payments etc.
Undertake a review prior to the year end to determine whether it is advisable to pay dividends before the end of the tax year.